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Saturday, February 18, 2012

Budget: CPF contribution rates for older workers to be raised

Earlier, I posted that CPF contribution rates for older workers are likely to increase. The budget 2012 announcements came out yesterday and this news is now confirmed. The increase will be gradual and the details of the first increase has been announced.
In this post, I will describe the new changes and my thoughts on these changes.

Employees older than 50 years old will now find themselves with a tighter cash flow. One who is aged 50-55 will find themselves taking home a 2% less of their gross income.

For example, for one who earns $5000 per month normally will take home $4400. His CPF contribution is $600 + $900 (employee + employer contributions)

With this change, he will take home $4300. His CPF contribution will be increase to $700 + $925

If we look at the cash + CPF, he is getting a bit more due to the increase in employer contributions. However, the actual cash he can use freely has reduced. For Singaporeans who don't know how to plan their own retirements, this will actually help them to set aside more money for their retirement needs. However, for people who know how to manage their money well, they may not welcome this move.

For age 50-60, with the increase in contribution rates only increase their CPF OA by 0.5%. The bulk of it will got to their SA and MA. This may be be both good and bad.

The good:

SA and MA has a higher interest rate of 4% as compared to OA's 2.5%. This will help these older workers to save up more for their retirement needs.

The bad:

There are many people who took up a HDB loan after the age of 30. If the loan period is 30 years, they will find themselves paying back until they reach 60. This increase in OA contributions is not going to help much to service their HDB loans.

B) Higher CPF contribution rates for older self-employed individuals

C) Higher Earned income relief for older workers

Self employed individuals will also see an increase in CPF contributions as well.

There will also be an increase in earned income relief. This will apply to individuals above the age of 55. I didn't quite expect this change but I feel that this is not going to help much.

Let me break down the numbers a little more. The income tax in Singapore is progressive. This means that at higher levels, the tax increases. The current tax rates is as follows:

For an assessable income of 20k, the tax rate is 0%

For an assessable income of 20-30k, the tax rate is 2%

For an assessable income of 30-40k, the tax rate is 3.5%

For an assessable income of 40-80k, the tax rate is 7%

For an assessable income of 80-120k, the tax rate is 11.5%

and so on...

If you fall into the band of 40-80k, the additional 3k in tax reduction is only $210 per year.
If you belong to the 30-40k, the tax reduction is only $105.
Yes, this is RELIEF, not REBATE.

The initiatives above are designed to help Singaporeans cope better with their retirement needs. For me, I will still continue with my own plans that do not take CPF balances into consideration. There is still a few decades to my own retirement and there is likely to be more changes along the way.